Location: Rexburg, ID
For Sale Website:
We found that there is an increasing demand for Rexburg housing as the Brigham Young University-Idaho campus continues to grow beyond its expected growth plan. The growth of the campus is directly correlated to the growth of the community. Therefore, based on local and industry data, Phethean & Cahill Corporation have proposed to purchase the following listing (#180275) for $1,399,900 and have projected earnings and costs for the next 17 years under the name A+ Apartments.
A+ Apartments is an Off-Campus Approved Housing Complex for Young Men and is located two blocks from the BYU-Idaho campus. The complex consists of 35 bedrooms with two occupants per room. Over the course of the next 17 years, Phethean & Cahill Corporation anticipate a 3% increase in revenue from year to year.
From the projections outlined in the excel spreadsheet, we found that A+ Apartments is capable of paying its obligations, or, in other words, they are able to turn its service(s) into cash given its increasing current ratio from year to year. For example, in 2013, their anticipated current ratio would be 4.49%. In 2014, their current ratio would increase to 9.08%, in 2015, 13.46%, and so forth. Furthermore, it is not likely that A+ Apartments will run into liquidity problems because inventory turnover and collecting accounts receivables are not factored in, since the total balance is collected upfront. Over this period, their return on assets will remain a constant 4%. This indicates that they are profitable relative to their total assets and gives us an idea of how efficient management is at using its assets to generate earnings. Moreover, the calculated debt-to-equity ratio is modest and experiences a steady decline over this length of time. In 2013, their anticipated debt-to-equity ratio would be 3.12%, the following year it would be 2.65%, the year after that would be 2.29%, and so forth. This shows that A+ Apartments will not aggressively fund its growth with debt. As a result, earnings are less likely to be volatile.
Lastly, we gathered that the internal rate of return (IRR) 7.04% Â is less the calculated weighted average cost of capital (WACC) (7.39%). This indicates that the price of the apartments is too high. In order for the WACC to equal the IRR, the price of the apartments needs to be $1,049,065 and the land cost $300,000, which is $49,935 less than the asking price. The seller needs to bear the burden of all the closing costs. Therefore, we can conclude that this project is worth investing, predicated on the seller lowering the asking price and covering closing costs. However, upon or during this investment, we would like to reevaluate the figures projected under Furnishings, Furnishing Depreciation, and Building Maintenance. In other words, we might reconsider purchasing furnishings at a lower cost, extend the life of the furnishings by another year, and cut costs where they are not necessary concerning building maintenance since these figures appear to affect the net income and balance sheet.